Investment Contrarians

Chavez Dies, What This Means for U.S. Investors

By for Investment Contrarians |

What This Means for U.S. Investors The death of Venezuelan leader Hugo Chavez is a significant event for millions of people around the world, including Americans.

The most obvious reason is oil, more specifically oil prices. With Venezuela being one of the top-five suppliers to America, any disruptions in supply will have a certain impact on oil prices.

Currently, Venezuela produces approximately 2.5 million barrels of oil per day (bopd), with one million barrels going to the U.S. His death could have a dramatic impact on oil prices, as well as long-term investing possibilities. (Source: Johnson, K., “After Chavez, a Question of His Country’s Oil,” Wall Street Journal, March 5, 2013.)

To begin with, Venezuela has one of the largest reserves of oil of any nation. Prior to Chavez becoming leader, Venezuela was producing approximately 3.5 million bopd. Under his mismanagement and social policies, this has dropped to 2.5 million bopd. Many analysts believed a decade ago that Venezuela should be producing over six million bopd, which would have provided long-term investing opportunities for international firms and kept a lid on oil prices.

However, the nationalization of many international companies meant that Venezuela has lacked in the development of new technologies and is deficient in skilled workers. America, in contrast, has become one of the largest oil and natural gas producers in the world, with significantly lower domestic natural gas and oil prices, providing a boon to those firms involved in long-term investing that have developed technologies to extract these commodities.

This leaves two big questions: where will oil prices go and are there any long-term investing opportunities?

Over the short term, Vice President Nicolas Maduro will lead the country until an election is called within 30 days. At this point, there is a massive amount of uncertainty behind the scenes.

Uncertainty is dangerous in a market such as oil. Supply lines around the world are quite tight. This means that a disruption along the supply chain would have a severe impact on oil prices internationally.

In the long run, it would be quite beneficial if a market-oriented leader emerged. This would provide long-term investing opportunities for businesses that can provide technological expertise as well as experience in helping to extract the abundance of various commodities from the ground. This would help keep oil prices relatively low. However, I think the transition period will be quite volatile.

Remember that a lot of international companies had their assets seized by the Venezuelan government. While there is the potential for long-term investing opportunities, I’m not sure international companies would be willing to take a chance on a country that has shown disrespect for the law in the past.

In addition, it is commonly known that the Venezuelan oil industry is poorly run. A shift in power might add confusion, which might increase the chances of a disruption in production, leading to volatility in oil prices.

It would be beneficial for Americans to have a leader that could help Venezuelans by allowing international firms with modern technology to help develop the vast wealth within that nation. But this could create long-term investing opportunities for companies that could provide advanced skills and knowledge.

This could also keep oil prices in check, creating a vast supply of oil between Venezuela, the U.S., and Canada.

Light Crude Oil Chart

Chart courtesy of www.StockCharts.com

Oil prices have recently sold off and are now resting on the 200-day moving average (MA). The potential for disruptions might lead to incremental buyers, adding support and potentially increasing oil prices. A break below the current level in oil prices could indicate a retest of the recent $85.00 lows.

However, I do not see a positive transition occurring anytime soon. I think it’s far more likely that there will be confusion and instability. I think it’s quite probable that the chances of higher oil prices are more likely over the short term.

Over the next month, we will learn more about how the political landscape will shape up. At that point, it would be better to evaluate if there are any long-term investing opportunities and what the most probable direction for oil prices will be.

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